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Capital goods orders decline for third consecutive quarter, belie recovery assumption

While analysts and commentators are celebrating an industrial revival, order inflow for EPC companies have witnessed a 6% decline qoq and 14% decline yoy in the December quarter – a third consecutive quarter of decline

Companies in the engineering, capital goods and infrastructure (ECI) segment have reported a decline in order inflow for the third consecutive quarter due to lacklustre activity by India Inc, especially in capital spends that has resulted in muted order inflows for ECI companies.

In a research report brokerage, Emkay Global Financial Services Ltd said, “Order inflows (estimated) for the third quarter of FY10 declined by 14% year-on-year (y-o-y) and 6% quarter-on-quarter to Rs302 billion and order inflows (estimated) for the first nine months of FY10 declined by 7% y-o-y to Rs961 billion.”

The decline in order inflows is led by cyclical or process sectors like metals, oil & gas and chemicals, witnessing near halt or standstill in capital expenditure (capex) activities. Structural sectors like power and infrastructure largely supported by government participation reported robust business activity translating into strong order inflows for ECI companies, the brokerage added.

It said companies like McNally Bharat Engineering Co Ltd and TRF Ltd reported strong growth in order inflows at 84% y-o-y and 60% y-o-y respectively in the first nine months of FY10 (estimated)—led by exposure to structural capex. Large companies like L&T recorded 12% y-o-y growth in order inflows, benefited by exposure to structural capital expenditure. Bharat Heavy Electricals Ltd (BHEL) is an exception, reporting 25% decline in order inflows in the first nine months of FY10 (estimated), despite significant exposure to structural capex. As expected, companies like Punj Lloyd Ltd and Elecon Engineering Co Ltd reported muted order inflows in the first nine months of FY10 (estimated) owing to large exposure to process capex.

For the third quarter of FY10 (estimated), Punj Lloyd Ltd witnessed a 100% y-o-y negative growth in order inflow, with not even a single order. While McNally Bharat Ltd has had a strong order inflow for the nine months, order inflow for the company witnessed a marginal decline of 0.6% y-o-y. L&T and Thermax reported a marginal increase of around 9% y-o-y. Order inflow for BHEL and Elecon Engineering has also declined sharply by 21.7% and 33.3% respectively.

McNally Bharat Ltd has emerged as the best performing company with high growth in order inflows. McNally Bharat’s order inflow has been boosted mainly by a slew of orders in the June- July 2009 period, mainly for power projects and steel & zinc plants. The company recently won an order worth Rs330 crore from Steel Authority of India Ltd (SAIL).

While there has been a lot of consensual optimism and management expectation for higher order inflows for ECI companies, such dismal order inflow figures are surprising.

Emkay said that it expects companies having least risk to FY11 (estimated) earnings accompanied by robust order inflows in the first nine months of FY10 (estimated) or healthy order book cover to progressively rollover the valuation to FY12E earnings in the next two quarters or by first quarter FY11 (estimated).

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